Line of Credit Or a Loan

If you are a homeowner in need of some instant cash, you may be looking into different financial options and one of them is borrowing against your home equity using a home equity line of credit. Whether you’re building an addition to your home or just paying down credit card debt, if you have equity in your home, you may be able to qualify for a home equity line of credit or take out a loan against your house. But which is the best option, a line of credit or a loan? This depends on your personal situation. Read on to see how each scenario can help you decide which option is best for you.

Loan Against Your House

If you apply for a loan against your home, you are basically applying for a second mortgage. With fixed rate second mortgage loan, you can borrow a set amount with fixed rate and make fixed payments every bill cycle, which could be anywhere from ten to thirty years; depending on whether you borrowed a short term or long term loan. The advantage of taking out a second mortgage allows you to know in advance how much you have to pay each month, which will help with budgeting. So having a loan may be a good option for you if you need a large amount of money all at once.

Line of Credit

A home equity line of credit, on the other hand, gives you flexibility and allows you to tap the equity in your house more than once, on an as-needed basis. For example, you might be approved for a $50,000 line of credit against your home equity. In that case, you would be able to borrow $1,000, $2,000 or $10,000 against your credit, writing a check for whatever amount you need. You only pay interest on the amount that you borrow, so if you don’t borrow anything, you don’t pay any interest. Ahome equity line of credit is typically structured to expire before your 30 year mortgage ends, so it may have a “draw” period, in which you can borrow at will (as well as a “payback” period, in which you must make payments against the line of credit). You may also have restrictions on how much you can withdraw. Your contract should spell out clearly what the restrictions are on your line of credit, and explaining any circumstances under which the entire outstanding balance would become due at once.

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